Definition of Traditional IRA:
A tax-qualified savings account for individuals that allows the account holder to set aside money for retirement. A traditional IRA differs from a Roth IRA in that the contributions to a traditional IRA are tax-deductible at the time they are deposited and both the principal and the income earned in the account are taxed as regular income when they are withdrawn as distributions. See Individual Retirement Arrangement (IRA).
Income thresholds may also apply. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Retirement savers may open a traditional IRA through their broker (including online brokers or robo-advisors) or financial advisor.
A traditional IRA (individual retirement account) allows individuals to direct pre-tax income toward investments that can grow tax-deferred. The IRS assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal. Individual taxpayers can contribute 100% of any earned compensation up to a specified maximum dollar amount.
How to use Traditional IRA in a sentence?
- Traditional IRAs (individual retirement accounts) allow individuals to contribute pre-tax dollars to a retirement account where investments grow tax-deferred until withdrawal during retirement.
- Upon retirement, withdrawals are taxed at the IRA owner's current income tax rate. Capital gains or taxes on dividends are not assessed.
- Contribution limits exist ($6,000 for both 2019 and 2020 for those under age 50; $7,000 for those 50 and older), and required minimum distributions (RMDs) must begin at age 72.
Meaning of Traditional IRA & Traditional IRA Definition